Post-P3: A New World Order

With the stroke of a pen on June 17, China transformed itself from a non-player among regulators of container shipping to the most important one. In the process, it belatedly took on a role commensurate with its stature as the world’s largest container market, accounting for some 25 percent of global liftings.

With its stunning rejection of a proposed alliance of unprecedented size composed of the world’s top three carriers, China laid down new terms to the industry. It said no carriers would be allowed to accumulate the market power envisioned by the P3. And, because no carrier can ignore the China market, the decision effectively laid down a new global standard. As a result of the decision by China’s Ministry of Commerce, future carrier alliances will be more limited in scope, won’t have integrated vessel operations centers, and won’t pose existential threats to its competitors.

Many saw the P3 as reflecting an attempt by an underperforming industry to achieve adequate returns by achieving greater efficiencies. The cost base of the P3 carriers — Maersk Line, CMA CGM and Mediterranean Shipping Co. — would decline as a result of their sharing of the largest, lowest-cost fleet of ships. Because the three carriers would still compete on price, customers would benefit from the lower costs carriers would pass along in the form of lower prices.

In disallowing the P3 carriers to realize such efficiencies, the MOFCOM decision was, the thinking goes, not in the interests of customers but rather should be seen as an industrial policy in favor of carriers that would have to compete against the P3, most notably its own state-owned carriers, Cosco and China Shipping.

“The country that is responsible for driving down ship prices and subsidizing its shipping carriers the most among all countries, is actually the deal breaker on behalf of companies it seeks to bail out even further, despite all the evidence of their continued failings,” shipping analyst Charles De Trenck wrote on LinkedIn.

That’s one point of view. Another is despite the P3 being generally accepted and that the risk of the three carriers colluding on price was almost nonexistent, they still would have achieved dominant market power because of their low cost base relative to competitors.

It would have allowed them to withstand overcapacity, rate volatility and possibly given them the opportunity to drive weaker competitors — of which there are several — out of the market by initiating predatory pricing actions.

The result would be fewer competitors, more market concentration and higher prices. MOFCOM alluded to this in saying, in a translation posted on JOC.com, that the P3 would force competitors to stay “at a disadvantageous position in further competition.”

That’s why some shipper groups that had seen the P3 as a threat to competitive balance hailed the decision. The U.K.-based Global Shippers’ Forum previously called on international regulators to investigate the P3’s impact on price and service, and had asked for appropriate changes to ease competition concerns, stating how the alliance would “fundamentally change the structure of container shipping markets.”

In response to the MOFCOM decision, it said, “The unprecedented size and scale that the proposed P3 global alliance was going to pose competition regulators was a concern.”

Certainly, the Chinese carriers aren’t taking the decision for granted. “This decision of MOFCOM is based on their own professional judgment. No matter what MOFCOM’s stance is on the P3, what Cosco has to do remains the same. We only focus on ourselves, focus on our own capabilities and improving our managerial and operational level,” Cosco Group President Li Yunpeng told the JOC.

The decision, coming after the Federal Maritime Commission had approved the alliance, exposed a bias in U.S. policy toward carriers — a bias that may be outdated. The U.S. is no longer a presence among major container lines, but it has a huge presence in the industry, nevertheless — through shippers. The large U.S. retailers, manufacturers and other shippers control tens of millions of TEUs of cargo moving on container lines and would suffer as a result of less competition. It was not obvious at all that a decision in support of the P3 was a decision supporting those companies.

FMC Commissioner Richard Lidinsky, the sole commissioner to oppose the P3, told JOC Senior Editor Mark Szakonyi: “I think the lesson learned for the commission is that maybe our experts and analysts missed some of the things the Chinese saw, not in terms of analyzing China trade … but the bigger and broader question of the impact of the alliance. If the alliance is global, we need to take a global view of it.”

Contact Peter Tirschwell at ptirschwell@joc.com and follow him on Twitter: @petertirschwell.

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